What were the main themes during the RBA meeting?

At yesterday's meeting the RBA again cut the cash rate by 25 bps to 1.50%.

The RBA suggested that although the global economy was continuing to grow, however at a lower than average pace, equally, Chinese growth appears to be moderating somewhat. In addition, the US reported weaker GDP at 1.2% at the end of last week. This result was distorted by inventory rebuilding, although consumer spending was very solid at 4.2%.

Inflation and the prospect of inflation remaining low over the medium term prompted the RBA to reduce the cash rate.

The RBA again highlighted that the current level of the AUD is “complicating” the necessary domestic economic adjustments. The prospect of the lower cash rate feeding into a lower exchange rate would have played in the RBA decision. Despite the cut in the cash rate, the AUD was largely unchanged at around .7540 following the announcement.

The currency market response underlines the futility of the RBA, or any Central Bank for that matter, attempting to engineer an exchange rate outcome against the market sentiment.

Importantly, the RBA appears more comfortable with the housing market and the level of activity in the market. The Bank notes that action by APRA is starting to have an impact, as too is the increased supply of apartments and the future supply coming on stream, especially on the east coast; all of which is acting to moderate price pressures.

The RBA is comfortable that the most recent rate cut will aid the economy to achieve sustainable growth, with inflation returning to the target range over time. This suggests that there will be an extended period of inflation below the current target of 2/3%. Perhaps we may see the RBA revise its target range lower, given the various factors driving the current inflation result. The likely trade off if this was to occur is that growth (both actual and potential) would suffer.

What was the RBA’s view on the economic growth data out of the US?

The RBA did not express a view on the US data specifically, rather they noted that global growth was somewhat patchy. As noted previously, the concern regarding the US data released late last week is largely centred on consumer spending being the only bright spot, and as the US heads into an election, the likelihood that consumers will continue to underpin growth is questionable. Equally, given the closeness of the election outcome, the business sector is expected to sit tight until the result is known.

What was the RBA’s view on the consumer price index?

The RBA effectively conceded that inflation has been taken out of the economy with very subdued growth in labour costs and very low cost pressures elsewhere; the outlook for inflation is more of the same for a longer period. This suggests that the RBA may still hold some rate cuts up its sleeve, although at this stage, it appears highly unlikely they would be tempted to use them over the course of 2016. 

What would be the impact of a cash rate cut?

In terms of the exchange rate, the impact would be negligible, and in the broader interest rate markets there would be no significant movement, given this reduction was widely anticipated.

Furthermore, with interest rates at the current absolute low levels, further interest rate reductions will likely have a marginal impact, at best. If investment decisions did not make sense at a cash rate at 1.75% there is little evidence to suggest that at a cash rate of 1.5% a real lot is going to change.

What is the RBA’s view on the Australia economy, global economy and the Aussie dollar? Is this different to ING Direct’s view?

The RBA sees the Australian economy in a period of low/no inflation with good growth, although clearly with the capacity to grow faster without creating extreme inflationary pressures. Rather a dose of limited inflation for the economy would be seen as a positive.

Again, the RBA would like to see the AUD lower and more closely reflecting development in the terms of trade over recent years. This has remained elusive and is a major challenge for the RBA in managing the economy. In the past, the exchange rate has been more responsive and has spared the burden falling completely on monetary policy, however, in the current environment of limited fiscal policy flexibility, monetary policy has to do more. 

The global economy appears to be giving conflicting signals, strong equity market growth, with declining/negative interest rates. Usually, you would see interest rates respond in light of the earnings growth that equity markets are predicting. This suggests that something is out of alignment and a correction in either market is required.